A 28% Plunge In Our Standard Of Living

For the average person, what is the immediate danger from the financial crisis?
Not just the financial crisis itself, but the government and Federal Reserve's
response to the financial crisis, which is essentially to create trillions
of dollars out of thin air? For you and me, what's the immediate, tangible
danger of this limitless bailout of the most politically powerful special interest
group in America, the bankers of Wall Street?

Some people would say a high rate of inflation, others would say a depression
- or both. For the average person, let me suggest that there is something we
don't usually think about -- a third danger -- something that could drastically
transform the day to day lives of 300 million Americans within a space of weeks
or months, because the fastest collapse occurs with what wasn't real in the
first place.

In this article we're going to discuss why about 10% to 30% of your day to
day standard of living hasn't been "real" for a number of years now. Because
this standard of living we take for granted is actually based on our running
a massive trade deficit, meaning that the United States consumes much more
than we produce.

If we were suddenly forced to consume no more than we produce -- which is
exactly what the financial crisis risks -- there would be catastrophic consequences
for the American consumer, potentially almost immediately. It's not too late
for the US as a nation, for us as individuals, but time is running out fast,
and if we are to find effective personal and societal solutions, then we need
to clearly understand the extraordinarily dangerous combination of a nation
in the midst of a severe financial crisis even while it has been running a
huge trade deficit for many years.

Personalizing The Trade Deficit

What the trade deficit represents is the difference between what the United
States produces as a nation and what the United States consumes as a nation.
For instance, in 2008, the US exported about $1.8 trillion, and imported about
$2.5 trillion. The difference between what we sold and what we bought was a
shortfall of $700 billion: the trade deficit. Huge number, but what does it
really mean?

Let's make it personal. There are 111 million households in the United States.
If we take $700 billion and we divide it by 111 million households, we come
up with a trade deficit per average American family of about $6,300 a year.
The median income per American household is about $50,000 per year.
So when we put the deficit into personal terms, it means that about 12% of
the standard of living of the average American family consists of goods we
consume from other nations, for which we don't produce enough with our own
goods to pay.

What does that mean for your family in practical terms? For an answer, go
to any Wal-Mart or other big-box retail store, or massive retail mall, and
walk the aisles. You will see row after row of goods, ranging from baby clothes,
to shoes, to DVD players, and what they all have in common is that they are
made in other countries and that we actually can't pay for them.

This may sound theoretical, perhaps even crazy, but there is nothing more
real and tangible than the trade deficit when it comes to the day to day standard
of living of the average American family. We're not talking about paper wealth,
or stocks, bonds or options. Goods and services that are consumed daily are
the ultimate reality. A $700 billion annual national trade deficit represents
$6,300 worth of goods and services per household, per year, that we can't pay
for. Instead of esoteric theory, let me suggest that every time you bring something
home from the store, you are relying upon our national trade deficit to pay
for part of what's in the bag.

28% Of Discretionary Income

So if other nations stopped letting us have what we can't pay for, we suddenly
have many less goods available and they would cost much more. Unfortunately,
this doesn't translate to going down from a 50 inch flatscreen TV set to a
44 inch TV in order to cut 12% from cost. Because the key measure here is what's
referred to as discretionary income.

Do you get to decide how to spend your entire paycheck every month? Of course
not. We have to pay the mortgage or rent, which is about 37% of income for
the median household, and we have to pay income taxes and social security and
medicare as well. For the average family -- the median family -- housing and
taxes take over half their income.

Meaning we've only got about $22,500 left per household, after housing and
taxes. And when we compare our $6,300 per household share of the national trade
deficit to what's left after housing and taxes, then we just lost about 28%
of our income.

Twenty-eight percent of our income. In every household in America. We're no
longer talking about new TVs, we're talking about putting gas in the tank,
because over half of of our oil is imported. We're not talking about steak
dinners but about whether we can go to McDonald's. And instead of the latest
fashion, we may be rediscovering a quaint historical artifact known as a sewing
machine. Except that we buy those from overseas too, so I'm not sure that will
work.

How Did This Happen?

Depending on your perspective - this is either a pretty horrible situation,
or a pretty neat trick. How have we been getting away with this? How did we
end up in Lotus Land these last few years?

Basically, other nations and -- we'll use China as the biggest example --
produce all sorts of goods for much cheaper than we can produce them ourselves,
with the biggest difference being that its laborers work longer hours for less
money. With globalization, we dropped our trade barriers, and let these less
expensive goods effectively destroy our own domestic industries, that used
to produce everything from cameras to clothing tissues to consumer electronics.
We have hollowed out our own economy, effectively moving our industrial strength
as a nation overseas.

Now from an ivory tower theory perspective, we pay for these goods using our
supposedly superior intellectual resources. But in reality, the rest of the
world doesn't value America's so-called intellectually superior knowledge nearly
as much as we would like them to. The proof? Look at the size of our trade
deficit in the real world. Because we don't have the goods to sell to them,
they buy US treasury bonds instead, and effectively use the US trade deficit
to fund the US budget deficit. Neat trick eh?

An Unstable Relationship

So how real are the chances of our having a precipitous drop in our national
standard of living because other nations will no longer provide goods that
we can't pay for?

Well, relationships like this are always unstable when we look back over world
history, but this is one that exists for a reason. China doesn't buy our treasury
bonds because they like us -- they buy them to prop up the value of the dollar,
keeping the dollar artificially high, so their goods stay artificially cheap,
and their industrial base can grow while ours shrinks. In other words, through
currency manipulation, they hollow out our real economy, build their real economy
and we get a temporary, artificially high standard of living. If they
cut us off too abruptly, the dollar plunges in value, we can no longer afford
the goods they sell, and then their own economy also likely goes straight into
depression.

So they've got their reasons to maintain the relationships, but this is still
quite unstable. Let me suggest that the chances of this unstable relationship
falling apart -- potentially quite abruptly -- are far higher than they were
in the past.

One reason is that we didn't used to have this huge imbalance, this inability
to pay for our own standard of living. And the greater the imbalance, the stronger
the forces pushing a correction, finding a natural balance. Pushing us towards
where we would be without massive currency manipulations.

The True Risk From The Bailout

The other reason is the financial crisis. Trillions of dollars are being created
out of thin air. The Federal Reserve and Congress are doing fantastically dangerous
things to the value of the dollar, in the interest of effectively bailing out
the most powerful special interest group in America, Wall Street and the bankers.
The idea that the US government is trying to preserve the value of the dollar
is becoming increasingly difficult to believe.

This is profoundly disrespectful to our creditors. The problem with relying
on other nations to provide your standard of living, is that you've just given
up control over your standard of living, and you'd better be very respectful
of the people who are providing it. We are not being respectful. With each
round of government spending that the government can't actually afford, as
it sells out the average citizen for the benefit of Wall Street, it ratchets
up the chances of a precipitous, entirely real drop in our national standard
of living. Straight down to living only off of what we can produce.

And now on a personal level, I do believe that we need to go there. We need
to get to the place where our national standard of living is based on what
our national economy actually produces; our national security depends on it,
as does the rebirth of American jobs. That doesn't mean we don't buy goods
from overseas, but that does mean that we produce enough in exchange pay for
them. However the key is how fast we go there. Because if it happens too quickly,
we risk national economic catastrophe.

What if that happens? What if we push our luck too far, what happens to the
US dollar and the US economy?

That will be the subject of the next article / video in this series, "Inflation
Supply Shock & A Plunging Dollar".

Taking Personal Action In An Unfair World

Politically, what is happening with the bailout of Wall Street is unconscionable.
The day to day standard of living for 300 million people in the United States
is at stake - yet, the billions in personal bonuses continue to go out to Wall
Street bankers, with no substantive regulatory changes. The average person
knows this is an outrage. Yet, nothing seems to be happening politically to
change this. If you want to help politically, then please send this article
around to those you know, so the full stakes will be known to more people.

Click
HereTo Learn About A Free Mini Course That Will
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If politics fails us all, then it isincumbent upon us to take personal action
to protect ourselves and our families. There are actions we can take as individuals,
but you won't read about them in the mainstream financial media. Following
the conventional financial strategies will likely do no more than continue
to set you up for victim status, in an insider's game that is rigged against
you. Instead, you need entirely different strategies than the failed strategies
that have been devastating all of our savings.

The good news is that you have more tools than you may think, some of which
may surprise you. Tools which can give you the opportunity to turn financial
disaster into personal net worth. But, if you want this to happen - then education
is the essential first step. You are going to have to not just understand,
but to master some of the financial forces and methods in play here. With Turning
Inflation Into Wealth being the first key step. Good luck to you in these perilous
times.

Would you like to find practical solutions to the issues raised in this
article? Do you know how to Turn Inflation Into Wealth? To
position yourself so that inflation will redistribute real wealth to you,
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Daniel R. Amerman is a financial futurist, author, speaker, and consultant
with over 20 years of financial industry experience. He is a Chartered Financial
Analyst (CFA), and holds MBA and BSBA degrees in Finance from the University
of Missouri. He has spent seven years developing a large, unique and intertwined
body of work, that is devoted to using the foundation principles of economics
and finance to try to understand the retirement of the Baby Boom from the perspective
of the people who will be paying for it.

Since 1990, Mr. Amerman has provided specialized quantitative consulting services
to financial institutions, with a particular emphasis on structured finance.
Previously, Mr. Amerman was vice president of an institutional investment bank,
with responsibilities including research, synthetic securities, and capital
market originations.

Two of Mr. Amerman's previous books on finance were published by major business
publishers. "COLLATERALIZED MORTGAGE OBLIGATIONS, Unlock The Secrets Of Mortgage
Derivatives", was published by McGraw-Hill in 1995. Mr. Amerman is also the
author of "MORTGAGE SECURITIES: The High-Yield Alternative To CDs, The Low-Risk
Alternative To Stocks", which was published by Probus Publishing (now a McGraw-Hill
subsidiary) in 1993. Advertised by the publisher as a professional "bestseller" for
four quarters, an Asian edition was sold as well.

Mr. Amerman has spoken at numerous professional seminars and conferences nationwide,
for a variety of sponsors including New York University, the Institute for
International Research, and many others. After the publication of his prior
books, he acted as keynote speaker at a number of banking related conferences
over the next several years.

This article contains the ideas and opinions of the author. It is a conceptual
exploration of general economic principles, and how people may - or may not
- interact in the future. As with any discussion of the future, there cannot
be any absolute certainty. What this article does not contain is specific investment,
legal or any other form of professional advice. If specific advice is needed,
it should be sought from an appropriate professional. Any liability, responsibility
or warranty for the results of the application of principles contained in the
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